The trust valued its non-Hawaiian real estate last year at
$743.9 million - more than a third of its overall assets

By Rick Daysog
Star-Bulletin

The salmon-colored granite and glass office complex rises 24 stories to overlook Mount Rainier and the Cascade Mountains, a fitting monument to the Pacific Northwest's economic boom of the 1980s.

But the Bellevue, Wash., high-rise, dubbed Skyline Tower, also could serve as a symbol for the Estate of James Campbell's huge appetite for mainland real estate.

The $2.2 billion estate purchased Skyline Tower in 1988 for $50 million, in its largest single-building acquisition to date, as part of a plan to diversify its assets.

Since the mid-1970s, Campbell Estate has quietly loaded up on mainland properties, purchasing scores of office buildings, retail centers and industrial complexes.

The trust, Hawaii's seventh largest private landowner, now owns 53 commercial properties in 12 states outside of Hawaii, rivaling the mainland real estate holdings of the state's largest private landowner, Bishop Estate.

In its 1995 annual report, Campbell Estate valued its non-Hawaii real estate at $743.9 million, or more than a third of its overall assets. Those properties account for more than half of the estate's annual earnings.

In 1995, the estate posted income of $40 million on revenues of about $148 million. That's about even from the year earlier's performance and up modestly from 1993 when income was $38.2 million on revenues of $124.3 million.

"It's the engine that produces the income," David McCoy, Campbell Estate's chief executive officer said of the estate's mainland holdings. "When you're dealing with a market the size of the mainland you're going to have more opportunities."

Building on the mainland

Campbell estate valued its non-Hawaii real estate at $743.9 million in 1995. Here is a listing of its mainland properties, dollar amounts in millions:

In fact, Campbell Estate has been moving more cautiously on its investments on Oahu, than on its mainland holdings. The trust, which has invested at least $130 million in the second city of Kapolei so far, is building out its massive Kapolei project incrementally to meet demand, which has been sluggish with the isle's economic downturn, McCoy said.

McCoy noted that many mainland developers who tried to build a planned community overnight, ran into financial problems when the market when south.

"It's not as if we've fallen asleep on Hawaii," McCoy said. "We're still bullish on Hawaii."

Campbell Estate's diversification strategy has come a long way from its inception in the mid-1970s when it was a land-rich, but cash-poor entity. The trust largely owned agricultural lands back then and was looking to protect itself in case of a downturn.

Oswald Stender, who served as the estate's chief executive officer between 1976 and 1988, recalled that the sugar industry's future didn't look promising at the time. Military spending also was facing likely cutbacks while the isles' pineapple industry was looking overseas in pursuit of cheap labor, said Stender, now a Bishop Estate trustee.

"We could see the handwriting on the wall," said Stender.

Real estate expert Nick Ordway said Campbell Estate made the prudent decision when it launched its diversification program decades ago.

While Hawaii's upswings tend to be more lucrative than those on the mainland, down markets here tend to be more severe, said Ordway, a business professor at the University of Hawaii.

"When our economy is good, it's very good. But when it's bad, it's very bad," said Ordway. "They basically have a very sound strategy."

But there's also plenty of risk. In 1989, Campbell Estate lost $4.7 million from its partnership interest in Concord Hotel Associates, which owned the Concord Hilton in Northern California.

According to McCoy, the hotel was performing well until competitors flooded the market with three new hotels in the Concord, Calif., area. The partnership sold the hotel in November 1989 for $10.7 million.

McCoy said that the estate has shied away from hotel and resort investments and trophy properties given their risky nature. Instead, they prefer to invest in existing properties with steady cash-flows and high occupancy rates, he said.

Currently, the estate's mainland holdings are dominated by retail properties, which account for nearly 47 percent, or $349 million, of its non-Hawaii portfolio. Office buildings represent 26.3 percent, or $195.4 million, of their mainland interests while industrial properties account for 26.2 percent, or $195 million, of their mainland investments.

Although profitable, the estate's diversification strategy has some constraints.

Unlike Bishop Estate, which is a perpetual nonprofit, charitable trust to educate children of Hawaiian ancestry, Campbell Estate is a private, for-profit trust set up 96 years ago for the heirs of Scottish seaman James Campbell.

Campbell Estate's for-profit status makes it difficult to invest in non-real estate assets such as stocks and bonds.

If the trust were to use proceeds from its land sales in Hawaii to invest in equities, it would face a hefty capital gains tax since the lands were acquired in the early 1900s, according to attorney Tom Foley, who served as the estate's court-appointed guardian for 1992 and 1993.

To avoid those hefty taxes, the estate reinvests proceeds from local real estate sales into similar properties, such as commercial real estate.

"You're not protecting the assets if you're giving a third of it away," McCoy said. "We don't sell things for that reason."

Tax considerations also will play a big role in the estate's succession plan. Under the will of James Campbell, the trust is set to terminate on Jan. 20, 2007.

Campbell's will stated that the estate will dissolve 20 years after the death of the last surviving daughter. Beatrice Campbell Wrigley, the last surviving daughter, died in January 1987.

The estate said it is exploring its options for beyond 2007. One possibility would be to transfer its assets to a successor corporation. Under this scenario, any income from the properties would be distributed to the heirs, who would own shares in the corporation.

An alternative would be to create a real estate investment trust, or REIT, which is a real estate mutual fund that would manage the estate's current investments.

A REIT could allow the successor entity to avoid paying corporate taxes and would require the estate to pay 95 percent of its taxable income to shareholders. The trust currently distributes 100 percent of its taxable income to beneficiaries.

"We're trying not to foreclose on any possibility," McCoy said.

Campbell Estate
at a glance

Founded: 1900 by Scottish seaman James Campbell for the benefit of his wife, Abigail Kuaihelani Maipinepine, and their four daughters.Chief executive officer: David McCoyTrustees: Paul Cassiday, Clinton Churchill, David Heenan, C. Dudley PrattAssets: $2.2 billionEmployees: 152Local land holdings: 71,800 acres (37,300 acres on Oahu, 28,700 acres on the Big Island and 5,800 acres on Maui.)